Logic Police Thread - the really DIFFICULT questions ...

BoatBoy said:
Where are these places ???????
(for the 1 bedroom apartments of course:) )

Dave
Click to expand...
Dave, several places the Surfers beach strip,a few in Brisbane they even offered free beer to me to sign up on the day,but after 5 free stubbies and 100 questions they just ask me to leave,any door :rolleyes: mat can sell real estate it's just a numbers game like everything else, not matter how many times some tosser in a new 5k suit, tell you this is the deal of your life..
willair..
 
Free Beer AND girls in mini skirts.................

Be still my beating heart :)

(I had actually thought RE touting like this was stamped out in the 90's)

Dave
 
yieldmatters said:
Agree with everything else he says but I don't agree about the interest rates. I see putting up rates as a tough but necessary way to get us off the debt. I suppose he sees some other alternatives in consumer credit laws that are a kinder way to do it - I don't know if that will work.
Click to expand...

He doesnt spell out what exact options in this article, but in an abc interview he states:

"We are going to have to allow a large number of debt moratoria, ultimately. I think people have been - I don't blame individuals for falling into this trap"

Interesting I havent heard this elsewhere......debt moratorium, hmm now that would slow things a little.

Full abc interview here: http://www.abc.net.au/worldtoday/content/2007/s2055693.htm
 
yieldmatters said:
This is what I want to know. How can the last 20 years repeat itself over the next 20 years? My argument is it can't because we will run out of capacity to take on debt. I don't know why this is so controversial.
Click to expand...

YLD matters i think you are spot on with part of your argument. I also cant understand how property will perform IN REAL terms (ie after inflation) in the next 20 years compared to the last 20 years.
Some of your theoretical arguments definately stand up. With the recent subprime crisis, one of the source problems was the calculation of risk based on recent history. The financial institutions financial models were created using historical data which validated compression in implied interest rates.
When the market went haywire in august these modelling variables were exposed as a falicy (spelling?).

HOWEVER in nomial values i think it is possible for gross returns to match or at least approximate the last 20 years, afterall so long as population levels increase demand for housing will increase.

My completely uniformed guess is that inflation is going to break out again which will increase peoples nominal incomes which will bring the REAL value of housing back towards historical long term mediums.
 
This fella http://www.the-great-retirement-experiment.com/blog.htm
is banking on high inflation and suggest that your mortgage is where the money is to be made.

So YM could be correct, as could everyone else, thanks to inflation!! :)



chilliaa said:
YLD matters i think you are spot on with part of your argument. I also cant understand how property will perform IN REAL terms (ie after inflation) in the next 20 years compared to the last 20 years.
Some of your theoretical arguments definately stand up. With the recent subprime crisis, one of the source problems was the calculation of risk based on recent history. The financial institutions financial models were created using historical data which validated compression in implied interest rates.
When the market went haywire in august these modelling variables were exposed as a falicy (spelling?).

HOWEVER in nomial values i think it is possible for gross returns to match or at least approximate the last 20 years, afterall so long as population levels increase demand for housing will increase.

My completely uniformed guess is that inflation is going to break out again which will increase peoples nominal incomes which will bring the REAL value of housing back towards historical long term mediums.
Click to expand...
 
s_t said:
This fella http://www.the-great-retirement-experiment.com/blog.htm
is banking on high inflation and suggest that your mortgage is where the money is to be made.

So YM could be correct, as could everyone else, thanks to inflation!! :)
Click to expand...

ahh.. great link! Unfortunately, even though we understand exactly what the governing bodies are up to, there's not much we can do about it, because by putting that money in the bank account (term deposit/cash), our money will just grow with inflation, with NO WEALTH whatsoever to speak with, and end up in a worse position than before. Also, with INCOME PRODUCING assets, that income will partially offset the effect of inflation, or fully offset if recession occurs and interest rate decreases (or the dreaded deflation occurs(
 
L.AAussie said:
I have 3 properties that have doubled in value since 2003, and as such the rental yields have dropped a lot compared to the current value. If I was in the market to buy them today, I wouldn't buy them.
Click to expand...
See the bold above. I think we are in violent agreement. That is my point. Current prices are strange.

L.AAussie said:
The return on investment for an I.P is a combination of rental yield, cap growth and tax benefits. I think that you should always look at all 3 at the same time to evaluate your investment return.
Click to expand...
Yes - I accept that. So my handle here (yieldmatters) is not comprehensive - it is only one part of your triangle (yields, capgrowth, and tax). I use the handle just to stir up a response - yields are pretty ordinary!

Tax is a big one - especially once you are already IN (i.e. CG tax). Cap growth - well - there are limits to this but nobody can agree on what the limits are. I think we are nearly at the limit - others think differently (which is fine).
 
L.AAussie said:
The thing about the ever-increasing debt you mention is that peoples' incomes keep going up (admittedly not very quickly). This keeps pace with the debt level to a degree. But, as people earn more, they spend more.
Click to expand...
The income is not keeping up with debt (in aggregate). Household debt measured as a percentage of GDP (incomes) is through the roof.

L.AAussie said:
This is the self regulation process in action. The result will be that property prices will slow, or stop for a while as there will be less people able to get and service finance. But, people will slowly get their financials in order, and be in a position to qualify for finance and the whole cycle will start all over again.
Click to expand...
But it is the bottom feeders - those that would not normally get debt - that are feeding the pyramid scheme from the bottom. So I think the debt being restricted to more 'solid' people will actually have an impact on all prices. We will see!
 
I find it interesting that in discussing the macro fundamentals that there is little or no mention of the fact that we are in a commodities boom cycle and the corresponding effect of money supply growth on commodity prices. This is inflationary and if it continues will alter investor behaviour from paper based to real assets such as commodities, precious metals and real estate. It isn't difficult to imagine that there will be problems on the supply side for new housing due to rising costs. Inputs such as
1. rising input costs via commodity prices and tradie wages,
2 rising interest rates adding to holding costs and
3. rising developmental approval costs (infrastructure etc),

will all make development less attractive and more risky. This will reduce supply whilst demand rises due to population growth and increased immigration. Competition will increase for all hard assets including established housing stock and prices rise as a result. Those who are in a position to take advantage of the situation and have the ability to cope with the rising interest rates will emerge better off whilst the middle and lower echelons who have less free capital to deploy will become poorer as a result. The 1970's inflationary booms are instructive in how these situations may play out. As Mark Twain said "History doesn't repeat itself, but it does rhyme."


Interested in your thoughts YM about the broader macro picture as described above?

Cheers

Shane
 
YM, you have this thing about income not keeping up with debt, at the macro/Australia level. That seems to be the primary basis of your concern?

On what type of figures are you basing this - averages, across Australia? Given that you are into the technicals, have you looked at the distribution of both income & debt???? If both incomes and debt are both uniformly normally/gaussian distributed then yes you might be correct. I don't have the data, but I suspect (strongly) they aren't distributed in such a manner.

I suspect what you would find, if you were to really analyse the figures, is that in some locations/groups debt to income ratio is at quite an acceptable level, whilst in others, it is at horrendus levels. It might well be that it is the former, in the areas that they live, who are to a large extent driving prices there. In those areas there might not be no debt problems, and hence house price continue to rise. In other areas, there may be huge problems, and falls in house prices. After the debt problems in these problem areas blows up, then the Australia wide debt to income ratio (which you are so focused on) might fall.

Everybody has been telling you that it is the micro that matters. You've been dismissing it becasue of concern at the macro level, but surely this provides some sort technical/theoretical basis for dividing the macro into the various micro populations?
 
plusnq said:
I find it interesting that in discussing the macro fundamentals that there is little or no mention of the fact that we are in a commodities boom cycle and the corresponding effect of money supply growth on commodity prices. This is inflationary and if it continues will alter investor behaviour from paper based to real assets such as commodities, precious metals and real estate. It isn't difficult to imagine that there will be problems on the supply side for new housing due to rising costs. Inputs such as
1. rising input costs via commodity prices and tradie wages,
2 rising interest rates adding to holding costs and
3. rising developmental approval costs (infrastructure etc),

will all make development less attractive and more risky. This will reduce supply whilst demand rises due to population growth and increased immigration. Competition will increase for all hard assets including established housing stock and prices rise as a result. Those who are in a position to take advantage of the situation and have the ability to cope with the rising interest rates will emerge better off whilst the middle and lower echelons who have less free capital to deploy will become poorer as a result. The 1970's inflationary booms are instructive in how these situations may play out. As Mark Twain said "History doesn't repeat itself, but it does rhyme."


Interested in your thoughts YM about the broader macro picture as described above?

Cheers

Shane
Click to expand...
Thanks Shane ... interesting thoughts. Couple of comments:

Most of the run up in prices we have seen since 2000 has been in the land. Construction costs have increased but not nearly as much. So the labour shortage (and subsequent labour costs) aren't having as big an impact as one would think.

Regarding the commodities boom - it is inflationary but only if the RBA allows it to be. I'm not sure about them yet - have they got the guts to dramatically slow economic growth to slow inflation? The Fed in the USA was all talk and then folded pretty quickly when it came down to it - they picked growth.

In an inflationary environment I generally agree with what you are saying but I don't consider realestate to be a hard asset. It's supply is virtually unlimited (in Australia anyway - land everywhere) - unlike gold for example which has a very solid supply limit so has been somewhat imune to idiot central bankers over the years.
 
s_t said:
YM, you have this thing about income not keeping up with debt, at the macro/Australia level. That seems to be the primary basis of your concern?

On what type of figures are you basing this - averages, across Australia? Given that you are into the technicals, have you looked at the distribution of both income & debt???? If both incomes and debt are both uniformly normally/gaussian distributed then yes you might be correct. I don't have the data, but I suspect (strongly) they aren't distributed in such a manner.

I suspect what you would find, if you were to really analyse the figures, is that in some locations/groups debt to income ratio is at quite an acceptable level, whilst in others, it is at horrendus levels. It might well be that it is the former, in the areas that they live, who are to a large extent driving prices there. In those areas there might not be no debt problems, and hence house price continue to rise. In other areas, there may be huge problems, and falls in house prices. After the debt problems in these problem areas blows up, then the Australia wide debt to income ratio (which you are so focused on) might fall.

Everybody has been telling you that it is the micro that matters. You've been dismissing it becasue of concern at the macro level, but surely this provides some sort technical/theoretical basis for dividing the macro into the various micro populations?
Click to expand...

Macro is just the sum of micro so I don't dismiss micro factors but I maintain that when it is all added up it has to make sense.

I think what you are saying makes sense and I generally agree with you. The debt is in fact not spread evenly - among age groups and geographically. the RBA presentation the other week had some data on this. And your scenario may be one that actually plays out - may be playing out now (see western Sydney vs eastern Sydney - one continues to rise, the other collapsing).

Personally I think the micro markets are connected (at least partially) so you are never truly protected. For example I know a lot of people in Brisbane that are buying prime property using the equity in their not-so-prime property as security and there buying capacity would slump if their other property flattened or dropped. The situation in Sydney though (west vs east) has so far proven me wrong - eastern suburbs continue to go strong. We will see if this continues.
 
Any comments YM?

DavidMc said:
1. Can you explain why the Australian situation cannot eventually become like it is in London, NY, Berlin, Paris or Singapore, where renting is the norm even for middle class families, the 'average house' isn't even a house and the generally accepted commute times are greater?
Click to expand...
 
yieldmatters said:
Thanks Shane ... interesting thoughts. Couple of comments:

Most of the run up in prices we have seen since 2000 has been in the land. Construction costs have increased but not nearly as much. So the labour shortage (and subsequent labour costs) aren't having as big an impact as one would think.

Given the commodity boom started much later perhaps the effects are still in the pipeline so to speak. I know with my renovations and repairs to property that costs have increased markedly. Labour costs appear somewhat contained but as an example it cost twice as much for my new copper gas pipe and fittings as it did for the two plumbers to works a day and a half each. These effects are being absorbed by reduced margins but eventually the commodity and wages price rises are passed through


Regarding the commodities boom - it is inflationary but only if the RBA allows it to be. I'm not sure about them yet - have they got the guts to dramatically slow economic growth to slow inflation? The Fed in the USA was all talk and then folded pretty quickly when it came down to it - they picked growth.

I wonder whether it maybe that the global money flows may make the RBA a little more ineffectual than in the past due to credit creation with commercial paper ala RAMS etc. If we have high interest rates then global money will flow to us from lower interest economies such as Japan etc ala the yen carry trade. If they perceive inflation then hard assets such as commodities will be bid up with the flow on effect.
In an inflationary environment I generally agree with what you are saying but I don't consider realestate to be a hard asset. It's supply is virtually unlimited (in Australia anyway - land everywhere) - unlike gold for example which has a very solid supply limit so has been somewhat imune to idiot central bankers over the years.
Click to expand...

I agree that real estate is less of a hard asset than gold (and less portable) but it is more essential to most people's daily lives. A look at Zimbabwe shows that eventually the basics of life become paramount. In Zimbabwe grain is apparently the preferred medium of exchange atm. The real estate markets esp in the US in the 1970's showed remarkable growth in the presence of inflation. That perhaps maybe due to decreasing supply and increasing demand...and perhaps being the preferred hard asset class of most people ie they won't sell their homes unless they have to.

I am not advocating any particular position, but just looking at the historical background of the last great inflationary environment, that actually happened in the latter stages of a commodity boom. Eventually it was killed off by 18% interest rates introduced by Paul Volcker of the Fed Res.

Thoughts?

Cheers

Shane
 
yieldmatters said:
For example I know a lot of people in Brisbane that are buying prime property using the equity in their not-so-prime property as security and there buying capacity would slump
Click to expand...
Y/M,you seems to know a lot about property values in Brisbane
and that's what integrity is all about ,but my question is what is
\ prime property to you and the investors you talk too,don't take
this question the wrong way,i'm just interested the way other property
investors balance their holdings and what areas?? then i will have a better
understanding of what you invest in,after all everyones opinions are important..
..willair..
 
willair said:
Y/M,you seems to know a lot about property values in Brisbane
and that's what integrity is all about ,but my question is what is
\ prime property to you and the investors you talk too,don't take
this question the wrong way,i'm just interested the way other property
investors balance their holdings and what areas?? then i will have a better
understanding of what you invest in,after all everyones opinions are important..
..willair..
Click to expand...

I've admitted I'm no good at the micro game! So not sure if you want to know but I THINK:

Morningside, Indooroopilly are prime in my view. Great areas.
Redbank or Forest Lake are not good areas in my view.

edit: In case you aren't aware I sold a place in Taringa. I was 85% sure of my move to sell at the time. Now only 50% sure ... this forum does strange things to you. Time will tell - at least the money is in the bag. It hasn't changed my view on the macro problems though. I am curently buying into an overseas commercial property listing which I think isn't bad (but could be wrong!)
 
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plusnq said:
I agree that real estate is less of a hard asset than gold (and less portable) but it is more essential to most people's daily lives. A look at Zimbabwe shows that eventually the basics of life become paramount. In Zimbabwe grain is apparently the preferred medium of exchange atm. The real estate markets esp in the US in the 1970's showed remarkable growth in the presence of inflation. That perhaps maybe due to decreasing supply and increasing demand...and perhaps being the preferred hard asset class of most people ie they won't sell their homes unless they have to.
Click to expand...
I think they would sell that second home if they had to (the IP) and as the number of people with IPs has risen then the asset category has become more volatile. So times now are a little different. But I take your point - it is more commodity like in that people need to LIVE somewhere. But the long term supply isn't really limited either like it is with other commodities (not theoretically anyway - lots of land in Australia).

Regarding inflation, globalisation has changed the power of the RBA but they still have a monopoly on $AUD. You could borrow in YEN or $US (e.g. RAMS) but when the loan is forwarded to home buyers it must be in $AUD which the RBA has a monopoly over. You will find that RBA monetary policy these days has a much greater effect on FX than long term interest rates as a result.

Regarding construction costs - I think you might be right. The effects are yet to work their way through. From my work I know that the costs to contruct anything is out of control.
 

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